A free-floating currency, a large and diversified economy, the absence of capital controls and an increasingly attractive tax regime continue to make Mexico one of the stars of emerging market portfolio investment. The Mexican peso remains the second-most widely traded emerging market currency after the Chinese yuan, and is often treated by investors as a proxy for emerging market sentiment more broadly. The country’s capital markets are sophisticated and highly regulated, and the advent of new financial products in recent years has broadened the range of instruments for international and domestic investors alike. As an increasing number of Mexicans choose to save for retirement using formal financial products and as insurance penetration grows – albeit both from low bases – the role of local institutional investors has been boosted.
Having long benefitted from a monopoly position, the Mexican Stock Exchange (Bolsa Mexicana de Valores, BMV) was joined in mid-2018 by the Institutional Stock Exchange (Bolsa Institutcional de Valores, BIVA). Investors hope the competition will lead to lower prices, better services and a wider range of investment opportunities. At the same time, a relatively conservative corporate culture among Mexican businesses continues to hamper the development of the financial markets when it comes to being a source of seed and expansion capital. As a share of GDP, the depth of Mexico’s capital markets lags behind some emerging market peers and more advanced economies, falling short of their potential to support economic growth across the board.
According to the Bank of International Settlements, the Mexican peso is second only to the Chinese yuan among the most actively traded emerging market currencies. However, unlike the yuan and many other currencies, the Mexican peso is free floating. This means that Banco de México, the country’s central bank, does not intervene in the market to target a certain value, but only does so during periods of extreme volatility to ensure smooth functioning of the market. As such, many global investors see the performance of the peso as a useful signal for emerging market sentiment at large. International investors are therefore very important players in Mexican capital markets, even though currency trading does not take place on any of the formal stock exchanges in Mexico itself.
The lack of state intervention, high liquidity and the presence of international investors mean that the peso tends to be one of the more volatile – or what investors call “high beta” – currencies traded. The currency tends to strengthen when global investor risk appetite is high, but is prone to bouts of volatility when either this risk appetite ebbs or certain events bring uncertainties. For example, the peso weakened significantly between mid-2014 and early 2017, losing more than one-third of its value and reaching an all-time low of MXN21:$1 towards the end of that period in the wake of the election of Donald Trump as president of the US, who has been vocal against Mexican interests at times. The peso has since experienced further bouts of volatility, notably in the run-up to Mexico’s own presidential election in mid-2018 and in the aftermath of the announcement by incoming President Andrés Manuel López Obrador, commonly known by his acronym AMLO, in October 2018 that construction of the new Mexico City airport was to be cancelled.
By the third quarter of 2019 the peso was trading at around MXN19:$1, a level similar to what was seen in the third quarter of 2016 before the election of President Trump. Given that inflation in Mexico has been higher than in the US during the three-year period, this suggests a real appreciation in the peso.
The BMV is the second-largest stock exchange in Latin America, after São Paulo’s Brasil Bolsa Balcão. Mexico City has had a stock market since the 19th century, and in 1975 this merged with two regional stock markets based in Guadalajara and Monterrey to form the BMV as a single, national exchange. The make-up of its equity market still reflects this geographic legacy, with upwards of 90% of the listings concentrated in four states. Since late 2014 the BMV has participated in the Integrated Latin American Market, a platform that brings together the stock exchanges of the four Pacific Alliance countries: Chile, Colombia, Mexico and Peru. Through its International Quotation System (Sistema Internacional de Cotizaciones, SIC), the BMV also offers Mexican investors the opportunity to trade in more than 2100 securities from global markets, about half of which are shares and the other half are exchange-traded funds. The SIC has become an increasingly important driver of the BMV’s business in recent years, as the number of securities available is consistently growing.
Operational since mid-2018, BIVA is the country’s second exchange, introducing a competing national bourse for the first time in Mexico’s history. As a new player, it boasts a high-quality technological platform and partnerships with Nasdaq and FTSE Russell. BIVA’s market share is still relatively small, and the bourse has not yet seen any initial public offerings (IPOs) in equity, but its trading volumes are growing rapidly. “Our market share was 7% in the first half of 2019 and up to 32% on our best day. We are happy with the progress so far,” Rodrigo Velasco, deputy CEO at BIVA, told OBG. BIVA has been particularly successful in attracting short-term debt securities, a category where it held a 10% market share in the first half of 2019, as well as alternative investment products such as development capital certificates (certificados de capital de desarrollo, CKDs) and investment project certificates ( certificado de proyecto de inversión, CERPIs). The International Quotation System allows investors to trade in more than 2100 securities from global markets, about half of which are shares and the other half are exchange-traded funds Entities can choose to list on either or both public markets and their securities can be traded simultaneously on both. Broker-dealers can route their orders to either of the exchanges on a “best-execution” basis so that the order is satisfied by whichever market can handle it best, taking into account price, volume and the speed of execution. This means that fewer orders are likely to go unfulfilled.
The primary regulator of Mexico’s capital markets is the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, CNBV), a semi-independent entity under the auspices of the Ministry of Finance and Public Credit. The CNBV is tasked with overseeing both the BMV and BIVA, and has duties related to authorisation, regulation, supervision and sanction within the financial system more broadly. The body also oversees brokers, asset managers and intermediation service providers, essentially covering all aspects of capital markets in the country.
Listings & Liquidity
There have been no IPOs or secondary offerings since 2017, a year in which four new firms listed on the BMV and a further six increased their capital on the exchange. Nonetheless, trading volumes have surged. “In the last three years we have seen high-frequency algorithmic traders become increasingly active,” Alfredo Guillén, COO at the BMV, told OBG. “Now about 80% of trades involve international investors.”
Liquidity has more than doubled since 2014, when 39.1m transactions accounted for MXN3.1trn ($160.3bn) worth of traded equities. By 2018, 95.3m transactions saw MXN3.9trn ($201.7bn) in equities traded at the BMV alone. Data for the first half of 2019 suggest that full-year activity on the exchange will be slightly behind 2018 levels on both measures: 45.3m transactions totalling MXN1.65bn ($85.3bn) were recorded in the first six months of the year. Having been valued at some MXN7.1trn ($367.1bn) at the end of 2014, total market capitalisation of the BMV reached a peak year-end value of MXN8.2trn ($424bn) in 2017, but has since declined to MXN7.7trn ($398.2bn) as of mid-2019.
While leading global equity indices have been hitting record highs in 2019, Mexico’s BMV IPC index was trading at levels below 40,000 by the third quarter – numbers last seen during the 2012-14 period. This compares to the all-time high of above 51,000, set in mid-2017. In late spring 2019 the index posted losses for 12 straight sessions, its worst streak since 1981. This recent underperformance comes against a backdrop of slowing economic growth, contracting investment, high interest rates, domestic policy uncertainty since the mid-2018 presidential election, and global trade tensions between the US and China.
The BMV’s overall price-to-earnings ratio has fallen from a high of 27.17 in 2015 to 16.75 in mid-2019, its lowest in more than a decade. With earnings still holding up reasonably well, the average dividend yield surpassed 1% for the first time since 2010, continuing a steady upwards march that began in 2014. While there is little expectation of an imminent return to above-trend GDP growth, expansion is nonetheless forecast to pick up in 2020, supported by better monetary policy. Lower interest rates should also help equity valuations in the long run, underlining the attractiveness of Mexican stocks.
Partially due to a relatively conservative corporate culture and a perception that a stock market listing entails both high costs and onerous bureaucratic procedures, few smaller or even mid-sized firms have historically sought listings. When BIVA launched as a competitor to the BMV, there was hope in some circles that there would be a series of new equity listings, including by mid-sized firms entering the capital markets for the first time.
This hope did not materialise in BIVA’s first year of operation, although both markets continue to step up their outreach. “The challenge to bringing more small and medium-sized enterprises (SMEs) to the market is overcoming their reservations to let the public know exactly who they are and what they have, as well as creating an independent board and increasing their transparency. To break that paradigm, the stock markets have to offer SMEs more time and less costly procedures,” Roberto Guerra, director-general of local securities rating agency Verum Calificadora de Valores, told OBG.
“A lot of firms are on hold for the moment because of heightened macro-political uncertainty,” Velasco added. “However, we are seeing a lot of interest, particularly from the next generation of business leaders. They are more open to diversification and stepping outside the confines of the family business. We are optimistic that more firms will come to market, particularly when uncertainty subsides.”
Long favoured by both international investors and conservative local institutional investors, Mexico’s bond market is highly developed, while its sovereign bond market is one of the deepest and most liquid of all emerging markets. Accounting for about half of all outstanding sovereign debt is Mbonos, standard fixed-rate, longterm bonds with maturities ranging from three to 30 years. Also available at maturities ranging from three to 30 years are inflation-linked bonds known as Udibonos. With terms up to five years, Bonos D are floating-rate bonds, but these instruments only account for a small proportion of total sovereign issuance. The fixed-income sovereign debt with the shortest maturity available are Treasury certificates, which are zero-coupon bonds issued weekly by the government as part of its Treasury management activities. Although available maturities range from one week to two years, the most common are dated from six months to one year at issuance. In mid-September 2019 there was MXN7.3trn ($377.5bn) worth of government securities in circulation, just under 30% of which were held by foreign investors.
The corporate bond market is relatively less developed than its sovereign counterpart and remains dominated by a small number of parastatal entities. These include the state-owned petroleum company, Petróleos Mexicanos (Pemex), the Federal Electricity Commission (Comisión Federal de Electricidad, CFE), and, to a lesser extent, state-backed mortgage providers the Housing Fund of the Institute for Social Security and Services of State Workers, and the National Workers’ Housing Fund Institute.
Although a small number of blue-chip listed firms, such as América Móvil and Grupo Televisa, periodically tap the bond market, the truly private sector corporate bond market is rather limited. This reflects a long-standing preference among large Mexican businesses for bank lending, which has historically been readily available at reasonably competitive rates (see Banking chapter). Corporate debt issuance has tailed off in recent years, from 18 transactions in 2017 to 10 in 2018 and to only one in the first half of 2019.
High real, inflation-adjusted interest rates – in excess of 4% in the third quarter of 2019 – have ensured that Mexican fixed-income assets retained attractive yields relative to equivalents in other emerging markets and, in particular, the most advanced economies of the world.
Operated by the BMV since 1998, the Mexican Derivatives Exchange (Mercado Mexicano de Derivados, MexDer) is the only listed derivative market in the country and benefits from a routing agreement with the Chicago Mercantile Exchange. It offers investors futures, options and swaps. In the decade through to 2018 the nature of MexDer trades has moved towards more transactions at smaller values. In 2008 there were 126,407 transactions for a total value of MXN7.6trn ($393bn). In 2018 the number of transactions were almost triple at 324,169, albeit down from the 2016 peak of 352,494. By contrast, the value of these transactions was three times lower, at MXN2.3trn ($118.9bn).
This trend continued during the first half of 2019, with the number of transactions at 126,479 for a value of MXN882bn ($45.6bn) over that six-month period. Low-value derivative trades have been driven by the fall in US dollar futures traded since 2014, while swaps and futures linked to the BMV’s main IPC index have held up reasonably well.
Mexican investors have been able to buy real estate investment trusts (fideicomisos de inversión y bienes raíces, FIBRAs) since 2004. Benefitting from an attractive tax regime, these instruments allow trusts to raise funds to acquire and develop real estate assets for the purpose of leasing them. In 2016 FIBRAs gave rise to a new instrument, the FIBRA-E, which is a similar vehicle that is dedicated to infrastructure and mature energy assets. Pemex and the CFE have been among the most active issuers, although purely private players have also tapped the market. The authorities are considering utilising FIBRA-type vehicles to finance some of the country’s most important infrastructure developments, including the Maya Train and Dos Bocas oil refinery.
As with other capital market instruments, however, the first three quarters of 2019 did not see a FIBRA issuance. The last to come to market was the Fibra Upsite, which raised MXN555m ($28.7m) in June 2018. As of mid-2019 there were 16 FIBRAs and three FIBRA-Es listed on the BMV, and none on BIVA.
Development Capital Certificates
CKDs have been quoted on the BMV since 2009. These development capital certificates were created as a means to mobilise “patient capital” from institutional investors. They typically finance one or more projects requiring large up-front investments in the expectation of delivering attractive returns over the long term, such as real estate developments or infrastructure works. As of mid-2019 there were 70 CKDs listed on the BMV, with a further six listed on BIVA after its first year of operations.
Investment Project Certificates
The first CERPI came to market in 2016 when local firm Mira Funds raised an initial MXN800m ($41.4m) through the BMV to finance urban construction projects. Structured similarly to CKDs, these investment certificates are designed to mobilise institutional investors, requiring that they invest at least 30% of the project amount. The main difference between a CKD and a CERPI is that the latter has less procedural restrictions on approving investments.
At the end of the first half of 2019 there were 15 CERPIs listed on the BMV and one on BIVA. According to local media, a record year in 2018 saw 11 CERPIs issued on the BMV for a total initial amount of $931.8m, with BIVA’s first CERPI raising about MXN800m ($41.4m). High activity is also expected in 2019, as 14 CERPI applications were on the waiting list to be placed on the BMV as of December 2018.
Although new issuance has tailed off since 2018, Mexico remains the leading market in Latin America for green bonds, which are instruments to fund sustainable projects. The Mexico City government, the country’s development banks and private sector players have all been active in this space, while work has also been under way in 2019 to issue a sovereign green bond.
Nearly half of the financing for a new $13bn airport to be constructed in Mexico City was raised through green bonds in 2016 and 2017, which helped cement the country’s leadership status. However, the announcement of the project’s cancellation by AMLO in October 2018 when he was the president-elect surprised financial markets and set back confidence in the asset class (see analysis).
Mexico has seen a number of innovative financial products reach the market in recent years, and stakeholders continue to address client demand. “The next frontier in financial innovation on the Mexican stock markets is probably asset-backed securities,” Velasco told OBG. “We could also see group IPOs that bring together a number of SMEs and similar mechanisms.”
The most recent addition to Mexico’s growing list of investment vehicles is the special purpose acquisition company (SPAC). This is an exchange-listed, equity-like instrument, with the key difference being that it is a new entity rather than an established firm coming to market by way of an IPO. In mid-2019 the BMV had two SPACs listed on the bourse.
The CNBV regulated 36 brokerage firms as of mid-2019, including domestic and foreign companies as either independent providers or part of larger financial groups. The year 2018 proved to be a challenging one for brokers, with one-third of them posting financial losses in the face of falling markets and uncertainty in the latter part of the year. In the 12 months through to March 2019 these 36 brokers saw their assets under management (AUM) decline by more than MXN1trn ($51.7bn), from MXN7.8trn ($403.3bn) to MXN6.7trn ($346.5bn), reflecting the challenging market conditions.
The two largest brokers had divergent fortunes: Inversora Bursátil saw its AUM fall from MXN2.6trn ($134.4bn) to MXN1.9trn ($98.2bn), while its closest competitor, BBVA México – formerly BBVA Bancomer – saw an increase from MXN900bn ($46.5bn) to MXN1.3trn ($67.2bn). Together, these firms dominate the local brokerage scene, with respective market shares of 28% and 19%.
One of the most important recent public policy initiatives in support of capital market development – and the corporate bond market in particular – has been on the fiscal front. In January 2019 President López Obrador issued a decree that serves to increase the attractiveness of holding Mexican corporate bonds and participating in IPOs. The decree established that a 100% tax credit is available to Mexico resident holders of publicly listed corporate bonds in Mexican firms against the withholding tax payable on the bonds’ coupon payments. In addition, until 2021 the capital gains tax on shares acquired in the IPO of a Mexico resident company and disposed of on a Mexican stock exchange is reduced from 35% to 10% so long as the holding is at least equal to an initial amount of MXN1m ($51,700). This tax incentive is set to remain in place for three years, at which point its success will be reviewed by the authorities.
After several years of innovation – notably the advent of new investment vehicles and the arrival of a second bourse – alongside the change in government at the end of 2018, the coming years are likely to be characterised by consolidation. Domestically, uncertainty around sectoral policies – specifically in energy, infrastructure and banking – of the AMLO administration may introduce periodic volatility in the securities of those sectors.
Despite the many strengths of Mexico’s capital markets, subdued economic activity and falling inflation open the possibility for the central bank to ease interest rates in 2020. While monetary easing can be expected to improve valuations in some asset classes, this must be weighed against the possible impact on the bond market and currency, since lower rates in Mexico imply a less attractive market for global fixed-income investors, particularly those engaged in carry trades. This may also mean less attractive yields on bond-like instruments such as CKDs and CERPIs. Pressure on the sovereign’s investment grade rating could also test fixed-income investor appetite. However, reduced rates could work to increase the attractiveness of equities.
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